2. Operating assets and liabilities

As of the balance sheet date, the aging structure of the trade accounts receivable, which are not subject to individual value adjustments, was as follows:

The individual value adjustments amounted to CHF 6 million (previous year: CHF 6 million). It is expected that part of the underlying receivables will be paid. Receivables not due are mainly receivables arising from long lasting customer relationships. Based on experience, GF does not anticipate any significant defaults. For further information on credit management and trade accounts receivable, see note 3.6.

Accounts receivable are stated at nominal value. Value adjustments for doubtful accounts are established based on maturity structure and identifiable solvency risks. Besides individual value adjustments with respect to specific known risks, other value adjustments are recognized based on historical experience of default risk.

Of the total income taxes receivable of CHF 22 million (previous year: CHF 22 million), CHF 12 million relate to the USA, CHF 3 million each to Austria and Germany, and CHF 1 million each to Switzerland, India, Turkey and to other countries.

Goods held for trading are generally stated at average cost and internally manufactured products at standard cost, including direct labor and materials used, as well as a commensurate share of the related overhead costs. Cash discount deductions are treated as reductions in the purchase cost. If the net realizable value is lower than the above, a corresponding valuation adjustment is made. Inventories with an insufficient turnover rate are partly or fully value-adjusted.

GF uses derivative financial instruments as part of its Corporation-wide risk management. Currency risk from accounts receivable, accounts payable, and financing in foreign currencies are partially hedged. The only hedging instruments employed are foreign currency contracts with a maximum maturity of twelve months. See also note 3.6.

The following table shows the carrying amount of all financial instruments per category. For details on the market values of the bonds, see note 3.1 (3.1.1 Interest-bearing financial liabilities).

The carrying amount of the marketable securities and funds recognized at their actual value is determined on the basis of the publicly available prices at the balance sheet date. Derivative financial instruments are stated at their market value at the balance sheet date.

Additions to property, plant and equipment included investment in equipment in Schaffhausen (Switzerland) in the amount of CHF 11 million, in Zhuozhou (China) in the amount of CHF 4 million and in a new building in El Monte (USA) in the amount of CHF 10 million for GF Piping Systems. Additions for GF Casting Solutions included investment in equipment in Suzhou (China) in the amount of CHF 6 million, the redesign of a plant in Altenmarkt (Austria) in the amount of CHF 7 million as well as ongoing investment into the light metal foundry in Mills River (USA) in the amount of CHF 31 million.

The disposal of buildings includes the sale of a building in the amount of CHF 6 million by GF Machining Solutions in Switzerland, see also note 1.2 (1.2.2 Other operating income).

In the previous year, the movements in the line “Changes in scope of consolidation” result from acquisitions and divestments, explained in more detail in note 4.1 (4.1.2 Acquisitions and divestments).

Land includes CHF 4 million of undeveloped properties (previous year: CHF 4 million).

The overall movements in the line “Other changes, reclassifications” are explained by mold and tooling equipment used at production facilities in China that had to be moved from net working capital to property, plant, and equipment as well as demo machines earmarked for sale reclassified to inventories.

In investment properties, the sale of properties in Schaffhausen (Switzerland) is recorded as a disposal. In the previous year, the sale of properties in Garching (Germany) and in Schaffhausen (Switzerland) was reported. The fair value of investment properties, as determined by internal assessments on the basis of capitalized and current market values, is CHF 98 million (previous year: CHF 112 million).

Impairments amounting to net CHF 5 million (previous year: CHF 12 million) related entirely to the relocation of production from Werdohl (Germany).

The values of non-current assets and intangible assets are reviewed whenever there are indications that their carrying amount may no longer be recoverable, due to changed circumstances or events. If such a situation arises, the recoverable amount is determined. It corresponds to the higher of the discounted value of expected future net cash flows and the expected net selling price. If the recoverable amount is lower than the carrying amount, a corresponding impairment loss is recognized in the income statement. The main assumptions on which these measurements are based include growth rates, margins, and discount rates. The actual future cash flows can differ considerably from discounted projections.

Property, plant, and equipment are stated at cost or manufacturing cost less depreciation and impairment. Financing costs of assets under construction are part of the costs of the asset if material. Assets held under finance lease contracts are capitalized at the lower of the present value of the minimum lease payments and fair value. The related outstanding finance lease obligations are presented as liabilities.

Assets are depreciated on a straight-line basis over their estimated useful lives or lease terms:

When components of larger assets have different useful lives, these are depreciated separately. Useful lives and residual values are reviewed annually on the balance sheet date and adjustments are recognized in the income statement. Any gains or losses on the disposal of items of property, plant, and equipment are recognized in the income statement.

Assets held under the terms of a finance lease are described in note 3.3.

The major categories of the intangible assets are subdivided into “Land use rights”, “Software”, and “Royalties, patents, others”.

In the period under review, the intangible assets amounted to CHF 36 million (previous year: CHF 34 million).

Land use rights in the amount of CHF 13 million (previous year: CHF 12 million) and royalties, patents, others in the amount of CHF 6 million (previous year: CHF 7 million), remained almost unchanged compared with the previous year.

Software amounted to CHF 17 million (previous year: CHF 15 million). The main reason for this increase was the industrial software and SAP implementation in various companies by GF Piping Systems and GF Machining Solutions.

The theoretical capitalization of the goodwill would affect the result of the consolidated financial statements as follows:

Goodwill from acquisitions is offset against the Corporation’s equity at the acquisition date. The theoretical amortization is based on the straight-line method over the useful life of five years. The adjustment in the year under review in the amount of CHF –1 million (previous year: CHF 6 million) is due to the adjustment of conditional purchase prices. The goodwill of Microlution Inc was completely amortized in the year under review. 

As of the balance sheet date no indications of impairment were found except for the goodwill of GF Urecon Ltd, Coteau-du-Lac (Canada), Global Supply Company LLC, Hallandale (USA) GF Casting Solutions SRL, Pitesti (Romania), GF Precicast SA, Novazzano (Switzerland) and Symmedia GmbH (Germany). These goodwill items were tested for impairment.

By applying the capital asset pricing model, individual costs of capital were calculated. The calculation required an assessment of the relative market risk of different peer groups as well as the determination of specific risk-free interest rates, an equity market risk premiums, the borrowing costs and relevant tax rates.

Since the cash flow projections were based on cash flows after tax, the discount rate has also been determined after tax. The discount rate for GF Urecon Ltd was calculated at 6.7%, for Global Supply Company LLC at 6.8%, for GF Casting Solutions SRL at 10.5%, for GF Precicast SA at 6.7% and for Symmedia GmbH at 8.9%.

The impairment tests for GF Urecon Ltd, Global Supply Company LLC, GF Casting Solutions SRL and Symmedia GmbH revealed that the resulting recoverable amounts based on value in use calculations exceeded the respective carrying amounts. The impairment test for GF Precicast SA showed that the value of the goodwill was not fully supported by the calculated value in use. As a result, an impairment charge on the partial carrying amount of goodwill of CHF 21 million was recorded in the theoretical goodwill reconciliation. GF Precicast SA mainly serves the international aerospace and industrial gas turbine markets. The partial impairment of the goodwill was triggered by the strong decrease in demand for aircraft engine parts. While a recovery in this market is expected, there is a greater level of uncertainty regarding the timing and magnitude of the recovery. GF has assumed a more conservative recovery compared to other key industries. In addition, the industry has also demonstrated relatively longer lead times. The relatively more conservative assumption on the recovery negatively affected the value-in-use calculation. While the theoretical goodwill was partially impaired, the carrying amounts of all other assets are still considered recoverable. An increase in the discount rate from 6.7% to 7.7% would have resulted in an additional impairment of CHF 13 million. As the terminal growth rate was assumed to be 0%, it was not further reduced for the purpose of sensitivity analysis. Even under the assumption of the higher discount rate, the other assets would still be considered recoverable.

For goodwill positions that are listed in the theoretical movements, an impairment test is performed if there is any indication that these goodwill positions could be affected from such an impairment. If such indications exist, an impairment test is performed for the goodwill positions offset against equity to determine the recoverable amount. As a basis for the calculation, business plans for the next five years are used. Subsequent years are included in the calculation using a perpetual annuity with a growth assumption of zero. The projections are based on knowledge and experience as well as on current judgments made by management as to the probable economic development of the relevant markets. It is assumed that there are no significant planned changes in the organization of any of the divisions, except for the measures already decided and announced.

Acquired licenses, patents, and similar rights are capitalized and, with the exception of land use rights, amortized on a straight-line basis over their estimated useful lives of 3 to 15 years. Land use rights are amortized over the duration of the usage rights granted. For this item, useful lives can be up to 50 years. Software is amortized on a straight-line basis over the estimated useful lives of 1 to 5 years.

In the event of business combination, goodwill as of the date of acquisition is calculated as follows: the acquisition price plus transaction costs incurred in connection with the business combination less the value of the acquired and re-valued net assets on the balance sheet.

The positive or negative goodwill resulting from acquisitions and changes in ownership are offset in equity against retained earnings at the date of acquisition. Upon the disposal of a GF Corporate Company, the goodwill previously offset in equity is transferred to the income statement. If parts of the purchase price are dependent on future results, they are estimated as accurately as possible at the acquisition date and recognized in the balance sheet. In the event of disparities when the definitive purchase price is settled, the goodwill offset in equity is adjusted accordingly.

The carrying amount of non-current assets (especially property, plant, and equipment, intangible assets, financial assets as well as the goodwill reported in the sample accounting) is reviewed at least once a year. If there is any indication of an impairment, an impairment test is performed immediately. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized in the income statement. As the goodwill is already offset in equity at the date of the acquisition, an impairment of the goodwill does not affect the income statement, but leads to a disclosure in the notes only.

All research costs are recognized in the income statement in the period in which they were incurred. Development costs are recognized as an asset only to the extent that the following specific recognition criteria are all met cumulatively:

Includes provisions for employee retirement benefits and other service-related employee benefits which are not provided by pension funds or similar institutions as well as anniversary bonuses and provisions for work accidents. For employee benefits provided by pension funds refer to note 5.1.

Cover expected expenses for warranty benefits such as repairs and replacements. All three divisions provide warranty benefits to their customers: 26% to GF Piping Systems (previous year: 20%), 44% to GF Casting Solutions (previous year: 40%) and 30% of the provisions relate to GF Machining Solutions (previous year: 40%).

Includes all obligations deriving from legal cases and litigations. None of the individual provision should lead to an outflow of more than CHF 5 million (previous year: CHF 10 million).

Summarizes contracts for which the fulfillment leads to unavoidable costs that exceed the associated economic benefits. Onerous contracts concern mainly GF Casting Solutions.

Summarizes provisions for legal and or constructive obligations deriving from restructurings. A constructive obligation arises when a detailed and formal plan for a restructuring exists and a valid expectation in those affected by the restructuring was raised. The increase and usage in provision is related to restructuring and relocation activities in Europe.

Includes all other events that give raise to a provision such as non-warranty claims by customers and risks from business activities not allocated to warranties, legal or onerous contract category.

In the course of their ordinary operating activities, GF Corporate Companies can become involved in litigation. Provisions for pending legal proceedings are measured on the basis of the information available and a realistic estimate of the expected outflow of resources. The outcome of these proceedings may result in claims against the Corporation that cannot be met or cannot be met in full through provisions or insurance cover. If there are any contractual obligations for which the unavoidable costs of meeting the obligations exceed the expected economic benefits (e.g. onerous delivery contracts), provisions are made for the agreed amounts over the entire period or over a prudently estimated period. These provisions are based on management assumptions.

The valuation of provisions in all categories is based on actual data if available (e.g. claims that have occurred or been reported) or on the experience of recent years and management estimates. The deferred tax liabilities are based on temporary valuation differences, which are reported in the balance sheet at the level of GF Corporate Companies.

Contingent liabilities amounted to CHF 90 million (previous year: CHF 81 million) and include guarantees to third parties. In 2020, GF sold all remaining interests in related parties. As a result, former guarantees to related parties in favor of third parties became guarantees to third parties. The amount of guarantees to former related parties in favor of third parties at year end was CHF 86 million (previous year: CHF 76 million).